Key Capital Market takeaways from the SEBI Board Meet…

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The SEBI board meeting on February 11th had some important takeaways for the Indian capital markets. SEBI’s detailed plan of action for 2017-18 is critical as it could have long term positive repercussions for the Indian capital markets. More importantly, the SEBI Board laid out the broad regulatory agenda for the capital markets for the financial year 2017-18. Here are some of the key points of discussion and how they could impact the capital markets positively…

Compressing the listing time further…

Over the last few years, the rapid strides in technology have helped SEBI to compress the listing period (the period between closure of an IPO/NFO and its actual listing on bourses) to just 6 days. Since IPOs and NFOs anyway happen through the demat route, SEBI sees the potential to compress this listing gap further to 3-4 days to begin with. The seamless integration between banking, trading and dematerialization should make it possible to compress it further. In the past, collection and payment through banks in smaller towns was the hassle. However, that is not the constraint any longer.

From an investor’s perspective, this will assist in shorter lock-in periods for their funds. Especially, in case of HNIs who use the funding route to apply in IPOs, this could substantially reduce their cost of funds.

Greater institutional participation in commodity markets…

This idea was first proposed in 2014, but due to different regulators, institutional participation in commodity derivatives could not take off. With the integration of the erstwhile FMC into SEBI in 2016, it is now possible to bring commodity markets also within the ambit of product offering for institutional investors. As an additional step towards making the commodity markets attractive for institutional investors, SEBI has also proposed to bring about closer integration between commodity spot and futures market as well as strengthen risk management and surveillance of commodity brokers.

This move will offer institutional investors like FIIs, banks and mutual funds an additional asset class to invest in. Apart from diversifying their risk, the integration of spot and futures market will also trigger the development of the spot-futures arbitrage for institutional, which is a multi-billion dollar business on the equities front.

Enhancing market liquidity through listing and trading of securitized receivables…

SEBI also proposes to allow the listing and trading of securitized receivables of Asset Reconstruction Companies. Here is how it will work. Securitization is the process by which future cash flows are securitized into a receivable and sold as a security to investors. Asset reconstruction companies (ARCs) typically take over the doubtful loans of a bank at a discount. In the interim, they can use the securitization route to finance the future receivables.

This is likely to be a big boost for the banks and ARCs as they can use the securitization route to monetize these assets in their books. Creating secondary market securities and listing them on the exchange will help create a wider market for such securities and reduce the cost in the process.

Simplifying Know Your Customer (KYC) process across the board…

These changes will be more in case of institutional customers where the KYC process is still quite cumbersome. Under the proposed SEBI plan, Foreign Portfolio Investors (FPIs) will be able to use a common application form for registration, opening of bank account, opening of demat account and application for Income Tax PAN. SEBI also proposes to set up an online facility wherein financial intermediaries can register themselves online without physical intervention. Today there are multiple layers of KYC that needs to be done for different businesses. SEBI also proposes a centralized KYC which will cover trading in equities, derivatives, commodities and forex so that the hassles of multiple registrations can be avoided. This will go a long way in nurturing the “Ease of Doing Business” in the Indian capital markets.

Greater focus on research and investor education…

SEBI plans to give a big boost to research and investor education during the financial year 2017-18. SEBI proposes to expand quality research inputs into commodity markets as well as work on the inter-linkages between the equity, commodity and forex markets. Currently, there is limited research being done into the interplay between these markets. Research into this area will not only give SEBI more quality inputs but also help better estimation of risks and focused risk management in these markets.

Review of the regulatory framework…

This has been on the anvil for quite some time. Typically, laws and rules tend to get reviewed on a regular basis to ensure that they are aligned with the changing demands of the market. SEBI proposes to review the Securities Contracts Regulation (Stock Exchanges & Clearing Corporations) 2012 and the SEBI (Depositories and Participants) Regulations, 1996. Both these Acts need to be changed to reflect the shifts that have taken place over the last few years in the capital markets. SEBI proposes to put up the proposed changes for public comments before taking them up for further discussions.

In a nutshell, the SEBI Board meet on Feb 11th has highlighted some of the key imperatives for capital markets. Tangible progress on these subjects during the financial year 2017-18 will go a long way in widening and deepening the Indian capital markets.

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